A Year to Forget for Yum! Brands

Yum! Brands has reported a 68% decline in global profit for Q313 (to September 2013) to US$152mn , leading to a 5.2% decline in its share price on October 9 2012 . This has all but wiped out gains in the stock since the beginning of the 2013 . The company, which owns KFC, Taco Bell and Pizza Hut, can attribute its poor performance over the last year to depressed sales from its KFC brand, particularly within China. While this has been a year to forget for Yum! Brands, their position in China, with the potential that the country holds, should see the company return to growth in the near future.

Yum! Brand's largest restaurant brand in China, KFC , continues to assert that its poor performance is only temporary, citing recent health and PR scandals. In December of last year, it was discovered that chicken used by KFC was injected with unapproved antibiotics and hormones, which was followed by an outbreak of bird flu in March of this year. This led to a decline of 20% of same-store sales in Q213, and continue s to depress sales in the fast food restaurant to date . KFC's management have been optimistic following Q2's results, publicly stating that they believed the brand will return to growth in Q313 . Following these results, however, they have admitted that growth make take somewhat longer to return than originally believed.

A Poor Year For Yum! As Fast Food Underperforms Market
Rebased Share Price With Selected Competitors (10/10/2012 = 100)

But it is not just KFC which has underperformed or been in the news for the wrong reasons in China this year. Yum ! 's Little Sheep chain, which along with East Dawning concentrates more on local Chinese cuisine, received negative publicity following quality issues about the lamb used in many of its dishes. Little Sheep also experienced declining sales and , earlier this year , was forced to write down a sum of USD259mn. McDonald's has also had a poor year in emerging markets . The company said on August 8 that comparable sales in Asia Pacific, the Middle East and Africa declined by 1.9% in July, following negative results in China, Japan and Australia. McDonald's has attributed their poor showing in China to the country's economic slowdown, as well as rising costs of raw materials, human resources and rents. Yum! Brands has experienced a much greater decline in sales and profits compared to McDonald's due to its larger exposure to China. The whole region of Asia Pacific, the Middle East and Africa made up 23% of McDonald's revenue in 2012, whereas China alone accounted for over half of Yum! Brands revenue in FY2012.

Great Exposure to China
Yum! Brands Share of Revenue By Country (FY2012)

Both companies , however, are still convinced that the greatest growth opportunities lie in emerging markets, and particularly China. Yum! Brand's commitment to China remains unabated, continuing to hold the view that the country represents 'the best restaurant growth opportunity of the 21 st century.' Indeed, the company continues to open more than one KFC restaurant in the region per day. Despite the poor results, the company still opened 132 new stores in Q313, bringing the total number of new store openings this year to 458. Similarly, they continue to drive their other brands into the market: Pizza Hut, Little Sheep and East Dawning.

2013 has been a year to forget for Yum! Brands. However it is believed that growth will eventually return for the company and its restaurants next year. The recent difficulties that they have experienced highlight the fact that not only their supply chains need to be evaluated, but the business environment in general. While shares may currently be taking a hit, being forced to address such problems now could mean that Yum! Brands will be in a position to expand at an ever growing pace.

This article is tagged to:
Sector: Food & Drink
Geography: China

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